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Sellers Seen Waiting in the Wings; April Weakens

April natural gas futures drifted lower Monday as traders continue to focus on a rangebound market and see no compelling reason for prices at current elevated levels. At the close April futures eased seven-tenths of a cent to $4.161 and May slid five-tenths of a cent to $4.241. April crude oil vaulted $1.26 to $102.33/bbl.

"[April] natural gas just fades away after it trades above $4.20. It's just such a channeled market that there is no other way of looking at it," said a New York floor trader. He added that "there is no fundamental reason for it to maintain these upper levels, and the cash market finished soft."

The trader did say he thought the market would trade higher for at least one more day "or at least going into the [storage] number on Thursday. I am betting on slightly higher highs, and at that point some traders are likely to try and hit it again [sell]."

The consensus seems to be that the market will trade within a range, albeit higher than before, but with patience and a strong stomach traders can still sell the rallies and buy the dips. "A lot of these guys that were selling the $4.18 area have seen it trade against them a little bit [Monday], but it looks like they are waiting it out. How many times did guys sell the $4.04 area and it worked? The better marketers know this market is a sale in the $4 area, but you just have to be a little patient," the trader said.

It was a tale of two exchanges in terms of the market outlook shown by managed money at the IntercontinentalExchange (ICE) and the New York Mercantile Exchange (Nymex). According to the Commodity Futures Trading Commission (CFTC) Commitments of Traders Report for March 15, traders at ICE liquidated long futures and options and stocked up on short contracts. At Nymex traders did the opposite by adding slightly to long positions but liquidating shorts.

The CFTC reported that long futures and options (2,500 MMBtu per contract) at ICE fell 21,820 to 252,052 and short holdings soared by 31,589 to 118,622. At Nymex (10,000 MMBtu per contract) traders added 1,090 long futures and options to 136,893, but shed 16,060 short positions to 278,369. All that trading had little impact on the front of the board. For the five trading days ended March 15, April futures rose 1.1 cents to $3.941.

If the number of contracts is combined for both exchanges and adjusted for contract size, combined longs fell by 4,365 and shorts dropped 8,163.

In spite of last week's gains, traders see the market as still having to surmount negative fundamentals. "Unlike the crude oil market, which seems to be ignoring the fundamentals, the natural gas market continues to trade off the perception that the fundamentals are very negative. At this time the fundamentals are negative, but it is our feeling that current price levels have already discounted a lot of bearish news," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

He added that "the gas market continues to be pressured by the producer, or his bank, which feels he needs to sell the rallies because he has no pricing power. Exaggerating the price weakness is the lack of urgency by end-users to do any forward purchases. Until something changes current perceptions, natural gas rallies will be fleeting. What eventually will be the catalyst to create buyer urgency is anyone's guess. We feel we are getting closer, but not there yet."

DeVooght sees the market as something of a waiting game. Producers are waiting for low prices to have an impact on production, yet at the moment the market is well supplied. "There is little doubt that at this time there is more than adequate production to meet current demand. The big question yet to be answered is: When will current prices result in lower production and higher demand? It is going to take time.

"On a trading basis it has been, and continues to be, our feeling that the gas market is establishing a base and will most likely continue to trade in the high $3 to high $4 range in the weeks and months to come. We will continue to sell put premium when we approach the $4 level and sell calls and contracts when we approach the $5 level."

The situation in Japan shows little improvement. Smoke was spotted Monday from the No. 2 and 3 reactors in the Fukushima Daiichi nuclear power plant. The No. 3 reactor has been the top priority for authorities trying to contain damage to the plant and stave off a possible meltdown. The occurrence of the smoke came in spite of efforts to cool the reactors and adjacent cooling pools.

Allied air strikes continued to pound Libyan air defense and other installations and threatened to prolong the outage of Libyan oil supplies. According to a CNN report Moammar Gadhafi's momentum has been halted and Libyan rebels have held onto areas that Gadhafi's forces had been poised to take over.

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